Share Sleuth: time to measure performance more accurately

This month, I have refrained from trading, although I might have added shares in Anpario had I realised the portfolio had enough cash to add a small holding. The company briefly strayed into value territory and now sits right on the cusp by my estimation. Like Porvair, Anpario has been on my watch list for many years.

Moreover, like Porvair, the single factor holding me back from adding shares in Anpario has been its valuation, so it is slightly galling that when the opportunity arose, I did not check I had the firepower to follow through! Hopefully I will have another opportunity to buy shares in Anpario.

This month, I will address a change to the presentation of this article. From now on, the vertical scale on the performance chart will be a logarithmic scale instead of the arithmetic scale we have been using.

Before I explain why, a caveat. I do not dwell on the performance of the portfolio because I do not believe short-term movements in the value of investments are correlated with long-term outcomes. This is why the Dogs of the FTSE strategy, regularly covered by Money Observer, works. Previous losers are often future winners. Anything less than 10 years is short-term to me, and were it not for the fact that readers are interested in Share Sleuth’s performance, I would not include the chart, or even generate it.

On 9 September, though, the Share Sleuth portfolio hits a significant milestone. It will be 10 years old, which means the chart will become somewhat meaningful. It will tell us whether I have been a better or worse investor than average, which brings me back to logarithmic scales.

Why scale matters

To show you how an arithmetic scale distorts performance charts I would like you to join me in a demonstration. The link http://bit.ly/Dow1929 will take you to a web page with a chart of the Dow Jones Industrial Average, a venerable US stockmarket index. Now un-tick the boxes above the chart that say “Log-scale” and “Inflation-Adjusted”.

This chart shows the index level on an arithmetic scale, and you should see a curve that gets steeper and steeper as time goes on, typical of long-term stockmarket charts. It goes right back to 1914, and includes the Wall Street Crash, the most dramatic stockmarket event of the 20th century. In the two years following 1929, the Dow fell by over 90%. Can you see it on the chart? In the 1920s, the line is almost flat. That is odd, because the much smaller 40% declines of the dotcom bubble after 2000 and the 50% decline during the financial crisis of 2008 are easy to pick out.

Now click the log scale box. The true picture comes into focus. The Wall Street Crash is restored to its rightful place, and the long-term growth of the stockmarket is almost a straight line, not an exponential curve.

The reason for the difference is the scale. An arithmetic scale goes up in equal increments, so the distance from two to four is the same as the distance from four to six. A logarithmic scale goes up in equal multiples, so the distance from two to four is the same as the distance from four to eight (both have doubled). The logarithmic scale keeps movements of the index in proportion. The more whatever we are charting goes up and the longer it goes up for, the bigger the discrepancy between the two scales.

To show the difference, we have put both an arithmetic scale and a logarithmic scale on the Share Sleuth chart and plotted its performance twice. The differences are more subtle than the Dow example, but they are already apparent.

If the portfolio continues to grow, the distortions of the arithmetic scale would get worse, which is why we have changed it.

Log scale paints truer picture

Missed adding Anpario

Portfolio

Cost (£)

Value (£)

Return (%)

Cash

2,964

Shares

108,816

Since 9 September 2009

30,000

111,780

273%

Company

Shares

Cost (£)

Value (£)

Return (%)

ALU

Alumasc

938

999

961

-4

AVON

Avon Rubber

192

2,510

2,496

CFX

Colefax

434

943

2,027

115

CGS

Castings

1,109

3,110

3,981

28

CHH

Churchill China

341

3,751

5,149

37

CHRT

Cohort

1,600

3,747

5,824

55

DTG

Dart

456

250

3,545

1,318

DWHT

Dewhurst

735

2,244

6,064

170

GAW

Games Workshop

198

568

6,269

1,004

GDWN

Goodwin

266

6,646

7,741

16

HWDN

Howden Joinery

748

3,228

3,707

15

JDG

Judges Scientific

252

5,989

6,665

11

NXT

Next

45

2,199

2,541

16

PMP

Portmeirion

349

3,212

3,909

22

QTX

Quartix

1,085

2,798

2,864

2

RSW

Renishaw

92

1,739

3,697

113

SAG

Science

2,660

2,908

5,400

86

SOLI

Solid State

1,546

4,523

5,890

30

SYS1

System1

463

1,793

857

-52

TET

Treatt

1,222

1,734

4,833

179

TFW

Thorpe (F W)

2,000

2,207

6,360

188

TRI

Trifast

2,261

3,357

4,319

29

TSTL

Tristel

750

268

2,175

711

VCT

Victrex

150

2,253

3,339

48

XPP

XP Power

339

6,287

8,204

30

Notes: No new additions. Transaction costs include £10 broker fee, and 0.5% stamp duty where appropriate. Cash earns no interest. Dividends and sale proceeds are credited to the cash balance. £30,000 invested on 9 September 2009 would be worth £111,780 today. £30,000 invested in FTSE All-Share index tracker accumulation units would be worth £64,432 today. Objective: To beat the index tracker handsomely over five-year periods Source: SharePad, 3 April 2019

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.